A comparative analysis of merchant and broker intermediation

This paper provides a comparative analysis of merchant and broker intermediation contracts. The intermediation process begins with commitment to a contractual form, after which intermediaries take actions, demand is realized, and trade occurs with buyers. Merchant intermediaries commit to a purchase quantity at the time contracts are formed, and are compensated with residual surplus. The merchant intermediary form is shown to be best suited to conditions in which demand has low variance, but is highly responsive to intermediary effort. On the other hand brokers do not take title to intermediated goods, and are compensated with revenue-sharing commissions. The broker intermediary form is best suited to conditions in which demand has large variance, and is independent of intermediary effort.